Cost analysis

EXAMPLE ONE: Basic Consolidation

Balance Sheet

H Ltd S Ltd

H Fixed Assets

Tangible £60,000 £40,000

Investments:

50,000 ordinary shares in S at cost £50,000

£110,000

Current Assets

Stock £20,000 £ 15,000

Debtors: S Ltd: £4,000

Other: £6,000

£10,000 £ 15,000

Bank £ 5,000 £ 6,000

Creditors Amount Due Within One Year

Due to H Ltd. £ (4,000)

Creditors (others) £ (7,000) £ 28,000 £ (7,000) £25,000

£138,000 £65,000

Ordinary Share Capital @ £1 £100,000 £50,000

Reserves £ 38,000 £15,000

£138,000 £65,000

Above are the individual balance sheets for H (the holding company) and S its 100% subsidiary. H has owned S since S was incorporated. Required: Prepare the consolidated balance sheet for the H Group.

SOLUTION ONE:

H & S GROUP

Fixed Assets Tangible £100,000 (60 + 40) Current Assets Stock £ 35,000 (20 + 15) Drs £ 21,000 (10 - 4 + 15) Bank £ 11,000 (5 + 6) £ 67,000 Creditors (Current due within one year) £(14,000) (7 + 11 - 4) £153,000 Ordinary Share Capital £100,000 (Share capital is holding co. only) Reserves £ 53,000 (38 + 15) £153,000 .

(1) Investment in subsidiary in H books cancels with share capital of S in subsidiary books (2) Cancel - inter company Debtors / Creditors. (3) Add together uncancelled items. (4) No cost of control arises so there is no goodwill. (5) H had owned S since incorporation therefore no pre acquisition period. (6) No minority interest arises as H owns 100% of S.

Groups share of post acquisition retained profits of subsidiary.

EXAMPLE TWO: Inter-Company Loan & Goods in Transit

Balance Sheet as at 31st December 95 H S Fixed Assets: Tangible £200,000 £150,000 Investments: Investment in S at cost 90,000 £1 ordinary shares £ 90,000 £30,000 10% loan stock in S £ 30,000 Current Assets: Stock £ 60,000 £ 40,000 Debtors £ 50,000 £ 35,000 Current

Account with S £ 20,000 Cash £ 5,000 £ 7,000 £135,000 £ 82,000 Creditors Within One Year: Current Account

with H - £ 13,000 Creditors £ 55,000 £ 25,000 Taxation £ 20,000 £ 15,000 £(75,000) £(53,000) £380,000 £179,000 Creditors After One Year: 10% loan stock £ 50,000 12% loan stock £ 80,000 Capital & Reserves: Ordinary shares £1 £200,000 £ 90,000 Reserves £100,000 £ 39,000 £380,000 £179,000 Above are the individual balance sheets for H (holding company) and its subsidiary S. H has invoiced S for goods to the value of £7,000 which S has not yet received.

H has owned 100% of S since S was incorporated. Required: Prepare the consolidated balance sheet for the H Group.

SOLUTION TWO: Fixed Assets: Tangible £ 350,000 (200 + 150) Current Assets: Stock £100,000 (60 + 40) Goods in Transit £ 7,000 (20 - 13) Debtors £ 85,000 (50 + 35) Cash £ 12,000 (5 + 7) £ 204,000 Creditors Within One Year: Creditors £ 80,000 (55 + 25) Taxation £ 35,000 (20 + 15) £(115,000) £ 439,000 Creditors After One Year: 10% loan stock £ 20,000 (Amount Owed outside group only) 12% loan stock £ 80,000 £100,000 £339,000 Capital & Reserves: Ordinary shares £1 200,000 (H only) £ 200,000 Reserves (H + S post acquisition retained reserves) £ 139,000 £ 339,000

EXAMPLE THREE: Basic Consolidation Rules to Date

Balance Sheet: H S Fixed Assets: Tangible £250,000 £150,000 Investment in S: 100,000 £1 ordinary shares £100,000 12% Loan stock: £ 75,000 Current Assets: Stock £ 75,000 £ 80,000 Debtors £ 40,000 £ 40,000 Current account

with S £ 30,000 Cash £ 10,000 £ 8,000 £155,000 £128,000 Liabilities Within One Year: Creditors £ 40,000 £ 30,000 Taxation £ 20,000 £ 10,000 Current account

with H £ 24,000 £(60,000) £(64,000) Liabilities After One Year: 10% Loan stock £(100,000) 12% loan stock £(90,000) £ 420,000 £124,000 Ordinary Share Capital £ 300,000 £100,000 Reserves £ 120,000 £ 24,000 £ 420,000 £124,000 H has invoiced S for £6,000 of goods which S has not yet received. H has owned S since incorporation. Required: Prepare the consolidated balance sheet for the H Group.

SOLUTION THREE:

Consolidated Balance Sheet:

Fixed Assets £ 400,000

Current Assets : Stock (incl. goods in transit) £161,000

Debtors £ 80,000

Cash £ 18,000

£ 259,000

Creditors amounts due within 1 yr Trade Creditors £ (70,000)

Taxation £ (30,000)

£(100,000)

Creditors amounts due after 1 yr 12% Loan Stock £ (15,000)

10% Loan Stock £(100,000) £(115,000)

£ 444,000

Ordinary Share Capital (H only) £ 300,000

Reserves * £ 144,000

£ 444,000

Reserves * (H reserves plus groups shares of the post acquisition retained reserves of S)

EXAMPLE FOUR: Minority Interest

Balance Sheet as at 31/12/1995

H Ltd. S Ltd.

Fixed Assets:

Tangible £ 70,000 £ 40,000

20,000 £1 ordinary shares in S £ 20,000 -

(At cost) Current Assets: £ 30,000 £ 20,000

£120,000 £ 60,000

100,000 £1 ordinary shares £100,000 25,000 £1 ordinary shares £ 25,000

Reserves £ 20,000 £ 35,000

£120,000 £ 60,000

Above are the balance sheets of H (holding company) and its subsidiary S.

H has owned 80% of S since S was incorporated.

Required:

Prepare the consolidated balance sheet for the H Group.

SOLUTION FOUR:

Consolidated Balance Sheet:

Fixed Assets

Tangible (70 + 40) £110,000 - (100% H + 100% S)

Current Assets (30 + 20) £ 50,000 - (100% H + 100% S)

£160,000

Long Term Liabilities

Minority Interests £ 12,000

£148,000

Share Capital £100,000 - 100% H only

[20,000 + .8 x 35,000] Reserves £ 48,000 - (100% H + 80% S)

£148,000

Workings:

The total assets and liabilities of S are included in the consolidated balance sheet even when only part of S is owned by H - provided there is control / dominant influence (FRS 2).

Minority Interest - amount of net assets as represented by ordinary share capital and reserves attributable to the minority. 20% of shares £25,000 x 20% £ 5,000

20% of reserve £35,000 x 20% £ 7,000

£12,000 Group Reserves - H reserves plus groups shares (80%) of the post acquisition retained

reserves of S

EXAMPLE FIVE: Total Minority Interest and Allocation of Reserves Between the Group and

Minority Interest

H Ltd. S Ltd.

Fixed Assets Fixed Assets

Tangible £ 70,000 Tangible £60,000

Investment in S Ltd.

20,000 £1 ordinary Shares £20,000

6,000 £1 Preference Shares £ 6,000

£7,000 12% Debentures £ 7,000

£ 33,000

Net Current Assets: £ 20,000 Net Current Assets: £30,000

Creditors after one year

12% Debentures £(20,000)

£123,000 £ 70,000

Capital and Reserves Ord. Share Capital £1 £ 25,000

Ord Share Capital £ 70,000 Preference Share Capital £ 12,000

Revenue Reserves £ 53,000 Capital Reserve £ 10,000

Revenue Reserve £ 23,000

£123,000 £ 70,000

Required: Prepare the consolidated balance sheet of the H Group. H acquired its interest in S when the company was incorporated.

SOLUTION FIVE:

Prepare separate working for minority interest and each reserve. Minority interest in reserves is based on minority share of ordinary share capital. The ownership of ordinary share capital decides ownership of reserves.

(1) Minority Interest ( 5,000 = 20%): 25,000 Ordinary Share Capital 20% x £25,000 £ 5,000 Reserves Capital 20% x £10,000 £ 2,000 Revenue 20% x £23,000 £ 4,600 £11,600 Preference Share Capital £ 6,000 = 50% x £12,000 £ 6,000 £12,000 £17,600 - Total Minority Interest (2) Capital Reserves: H Ltd. - S Ltd (H’s share) £10,000 x 80% £ 8,000 - Post Acquisition Only £ 8,000 - Total Capital Reserve (3) Revenue Reserve: H Ltd. £53,000 S Ltd (H’s share) 23,000 x 80% £18,400 - Post Acquisition Only £71,400 - Total Revenue Reserve Consolidated Balance Sheet of H Group: Tangible fixed assets £130,000 (70 + 60) Net current assets £ 50,000 (20 + 30) Creditors After 1 Year 12% debentures £(13,000) - External liability only Minority Interest £(17,600) £149,400 Capital & Reserves Ordinary Share Capital £ 70,000 - H only Capital reserve £ 8,000 Revenue reserve £ 71,400 £149,400

EXAMPLE SIX: Dividends Receivable Payable; Working off up to date information for the purposes of consolidation H Ltd. S Ltd.

Fixed Assets

Tangible £ 10,000 Tangible £ 8,000

Investment in S

6,000 ordinary shares @ £1 £ 6,000

£ 16,000

Current Assets £5,000 Current Assets £ 6,000

Current Liabilities £(2,000) Current Liabilities

Creditors £(1,000)

£ 3,000 Proposed Div.£(1,000) £ 4,000

£ 19,000 £12,000

Ordinary Share Capital £ 10,000 Ordinary Share Capital £10,000

Revenue Reserve £ 9,000 Revenue Reserve £ 2,000

£ 19,000 £12,000

H has not taken credit for dividends receivable from S. H has owned 60% of S, since S was incorporated. Required: Prepare the consolidated balance sheet for the H Group. If H has not taken credit for dividends receivable from S the following entries are required: H: Dr Debtors - with H’s share of the dividend Cr Reserves - with H’s share of the dividend The debtors in H will cancel with part of the creditors in S (for dividends payable) leaving only the dividend payable outside the group i.e. the amount of proposed dividend which is attributable to the minority interest. This figure will appear as a current liability in the consolidated balance sheet.

SOLUTION SIX:

(1) Bring H’s individual balance sheet up to date for the dividends receivable from S (60% of

1,000) / Adjust H balance sheet for dividends receivable. The revenue reserves of H also have

to be updated.

Debit Debtors in H £ 600

Credit Reserves in H £ 600

(2) Minority Interest in S

40% of O.S.C. £ 4,000

40% of Revenue Reserve £ 800

£ 4,800

(3) Group Revenue Reserves

H (adjusted) £ 9,600 (£9,000 + £600)

Share of S £ 1,200 (60% of £2,000)

£10,800

Consolidated Balance Sheet of H Group:

Fixed Assets £18,000

Current Assets £11,000 (£5,000 + £6,000

Debtor in H of £600 cancels with

creditor in S of £600)

Current Liabilities (£3,000) £2,000 + £1,000

Proposed Dividend (£400) £ 7,600 (£1,000 - £600)

£25,600

Long Term Liabilities £ 4,800

Minority Interest £20,800

Ordinary Share Capital (H only) £10,000

Revenue Reserves £10,800

£20,800

Amount payable to minority only

Post acquisition element

EXAMPLE SEVEN: Dividend Adjustments and Working Off Up To Date Information

(a) preference dividend of S Ltd.

Provide for: (b) proposed ordinary dividend of 10% by S Ltd.

(c) proposed ordinary dividend of 15% by H Ltd.

H Ltd S Ltd

Tangible Assets £100,000 Tangible Assets £120,000

Investment in S

60,000 £1 O.S.C. £60,000

10,000 £1 12% preference shares £10,000 £ 70,000

Current Assets £50,000 Current Assets £40,000

Creditors within one year Creditors within one year (£24,000) £ 26,000 (£16,000) £ 24,000 £196,000 £144,000

Ordinary Share Capital £100,000 Ordinary S/C £100,000

Pref. £1 12% £ 20,000

Revenue Reserves £ 96,000 Revenue Reserve £ 24,000

£196,000 £144,000

Required: Prepare the consolidated balance sheet of the H Group.

SOLUTION SEVEN: (1) Adjust both H and S for dividends payable and receivable H Ltd S Ltd Tangible Assets £100,000 Tangible Assets £120,000 Investment in S 60,000 £1 O.S.C. £ 60,000 10,000 £1 12% pref. £ 10,000 £ 70,000 Current Assets £ 57,200 Current Assets £40,000 Current Liabilities (£39,000) £ 18,200 Current Liabilities (£16,000) Proposed Pref Div (£ 2,400) Ord Div. (£10,000) £ 11,600 £188,200 £131,600 O.S.C. £100,000 O.S.C. £100,000 Preference Share Capital £ 20,000 Revenue Reserves (96,000 + 1,200 Revenue Reserves £ 11,600

+ 6,000 - 15,000) £ 88,200 (24,000 - 2,400 - 10,000) £188,200 £131,600 Workings: Current Assets (H Ltd) Opening Balance £ 50,000 Adjustments: Preference Dividend receivable 50% of £2,400 £ 1,200 Ordinary Dividend receivable £ 6,000 £ 57,200 Minority Interest Ordinary share capital 40% of £100,000 £ 40,000 Revenue Reserve 40% of £11,600 £ 4,640 Preference Share Capital 50% of £20,000 £ 10,000 £ 54,640 Revenue Reserves Revenue Reserves H Ltd (adjusted balance) 88,200 Share of S Ltd’s adjusted reserve (11,600 x 60%) 6,960 95,160 Minority Interest: Current Liability Preference Dividend (2,400 x 50%) 1,210 Ordinary Dividend (10,000 x 40%) 4,000 5,200 SOLUTION SEVEN:

Consolidated Balance Sheet of H Group:

Tangible Fixed Assets £220,000

Current Assets £90,000

(57,200 + 40,000 - 1,200 - 6,000)

Current Liabilities

Creditors £40,000

Proposed Dividend £15,000

Minority Proposed Div. £ 5,200 (£60,200) £ 29,800 (1,200 + 4,000) £247,800 Less Minority Interest £ 54,640 £195,160 Ordinary S.C. £100,000

Reserves £ 95,160

£195,160

The inter company debtors in H will cancel with the creditors in S leaving only the dividends payable to the

minority. The reserves of H and S reflect the up to date figures for consolidation purposes.

EXAMPLE EIGHT: Goodwill Calculation Arising on Consolidation

H S Assets £250,000 Assets £150,000 Investment in S 75,000 £1 Shares £125,000 Net Current Assets £100,000 Net Current Assets £ 70,000 £475,000 £220,000 O.S.C. £1 £300,000 O.S.C. £1 £100,000 P & L Reserve £175,000 Reserves £120,000 £475,000 £220,000

H purchased shares in S when S reserves were £50,000.

Goodwill: Cost of Investment £125,000

Acquired: O.S.C. £100,000 x 75% £75,000 Reserves £ 50,000 x 75% £37,500 £112,500 (difference between the cost of the investment and the fair value of net assets acquired) Goodwill £ 12,500

Minority Interest:

25% of £100,000 = £ 25,000 25% of £120,000 = £ 30,000 £ 55,000

Group Reserves: H Ltd = £175,000 Groups share of post acquisition reserves of S (£120,000 - £50,000) £70,000 x 75% £ 52,500 £227,500 Consolidated B/S H Group: Fixed Assets £400,000 Intangible Asset (Goodwill) £ 12,500 Net Current Assets £170,000 £582,500 O.S.C. £300,000 (H only) Reserves £227,500 Minority Interest £ 55,000 £582,500

Goodwill will be capitalised and amortised to the P & L account over a defined period normally 20 years on a

systematic basis.

EXAMPLE NINE: Acquisitions of Subsidiaries during the year

H ACQUIRED 80% OF S ON 31ST MARCH 1995. The share premium and revenue reserves of S at the

31/12/1994 were 12,000 and 20,000 respectively. From the information provided below you are required to

prepare the consolidated balance sheet of the H Group.

Draft Balance Sheet of H & S at 31st Dec 1995

H Ltd S Ltd

Fixed Assets

Tangible fixed assets £ 70,000 £50,000

32,000 £1 ord. shares in S £ 80,000

Net Current Assets £ 40,000 £34,000

£190,000 £84,000

Capital and Reserves:

Ordinary Shares £1 £100,000 £40,000

Share Premium account £20,000 £12,000

Revenue Reserves £70,000 £ 90,000 £32,000 £44,000

£190,000 £84,000

SOLUTION NINE: Revenue Reserves calculation:

S Profit for year £32,000 - £20,000 = £12,000 Pre Acq. £12,000 x ¼ = £ 3,000 Pre Acq. Revenue Reserves £20,000 + £ 3,000 = £23,000 Share Premium All Pre Acquisition

Minority Interest: 20% (40,000 + 12,000 + 32,000) £16,800

(Note breakdown between pre and post acquisition reserves is irrelevant for the minority interest.)

Goodwill:

Cost of Investment £ 80,000 Less group share of assets at date of acquisition: O.S.C. £40,000 Pre acq. share premium £12,000 Pre acq. revenue reserves £23,000 £75,000 Groups share 80% = £(60,000) Goodwill £ 20,000 Consolidated Revenue Reserves: H Ltd. £ 70,000 S Ltd 80% of (32000 - 23000) Groups share of post acquisition reserves £ 7,200 Total £ 77,200 H Consolidated Fixed Assets £120,000 (50 + 70) Intangible Assets £ 20,000 Net Current Assets £ 74,000 (40 + 34) £(16,800) Minority Interest £197,200 Ordinary Share Capital £100,000 H only Share Premium A/C £ 20,000 Revenue Reserves £ 57,200 £177,200

EXAMPLE TEN: Pre Acquisition Losses of Subsidiary

H acquired 100% of S for £180,000 on 1st Jan 19X1. S revenue reserves had a debit balance of £60,000 at this date. In 19X1 S made a profit of £75,000.

31 December 19X1 H S Consol. Assets £190,000 Assets £ 95,000 £425,000 Invest in S 100,000 £1 osc Current Assets £ 30,000 Current Assets £ 20,000 £ 50,000 £400,000 £115,000 £475,000 O.S.C. £200,000 O.S.C. £100,000 £200,000 Revenue Reserve £200,000 Revenue Res. £ 15,000 £275,000 £400,000 £115,000 £475,000 Goodwill: Cost of Investment £180,000 O.S.C. £100,000 Losses (£60,000) £ 40,000 £ 40,000 Goodwill £140,000 Reserves: H £200,000 Share of post Acq. £75000 x 100% £ 75,000 £275,000

(190+95+140)

EXAMPLE ELEVEN: - Revaluation of Assets of Subsidiary to Fair Value (FRS 7) on Consolidation H acquired 80% of OSC of S on 1 January 19X5. Fair value of S assets was £40,000, higher than book value. Balance on revenue reserves of S were £30,000 at 31st December 19X4. S did not incorporate any revaluation into its own financial statements. S depreciates its fixed assets

at 10% per annum.

Balance Sheets of H and S as at 31 December 19X5

H Ltd: Fixed Assets Tangible assets: £ 90,000 Invest in S at cost: £ 80,000 Net Current Assets: £ 20,000 £190,000 Capital and Reserves Ordinary Share Capital: £100,000 Reserves: £ 90,000 £190,000 S Ltd: Fixed Assets: £ 50,000 Net Current Assets: £ 12,000 £ 62,000 Capital and Reserves Ordinary Share Capital: £ 25,000 Retained Profit: £ 37,000 £ 62,000 Required: Prepare the consolidated balance sheet of the H Group.

SOLUTION ELEVEN:

Additional depreciation / Debit P&L £40,000 @ 10% = £ 4,000 Credit Accumulated Depreciation £ 4,000 Assets of S at Fair Value - Book Value £ 50,000 Fair Value Adjustment +£40,000 Less Additional Depreciation - £ 4,000 £ 86,000 S Ltd adjusted retained reserves. Balance per accounts at 1 Jan X5 £ 30,000 Profit for year ended 31 Dec 19X5 Per accounts (37,000 - 30,000) £ 7,000 Less additional Depreciation 40,000 x 10% (£4,000) £ 3,000 Adjusted retained reserves at 31 Dec 19X5 £ 33,000 Revaluation reserve (All pre acquisition) £ 40,000 Minority Interest: O.S.C. 20% £25,000 £ 5,000 Reserves 20% £33,000 £ 6,600 Revaluation Reserve 20% £40,000 £ 8,000 £ 19,600 Goodwill: Cost of Investment £ 80,000 Share of Net Assets represented by: Ordinary Share Capital £25,000 Reserves on Acq. £30,000 Revaluation Res. £40,000 £95,000 @ 80% £ 76,000 Goodwill £ 4,000

SOLUTION ELEVEN (contd): Consolidated Revenue Reserves:

H Ltd. £ 90,000

Share of S post Acq. retained

profits £3,000 @ 80% £ 2,400 (after S has charged additional depreciation)

£ 92,400

H Group Consolidated Accounts:

Tangible Fixed Assets £176,000 (90 + 50 + 40 - 4)

Intangible Fixed Assets £ 4,000

Net Current Assets £ 32,000 (20 + 12)

Minority Interest £ 19,600

£212,000

Ordinary Share Capital £100,000

Revenue Reserves £ 92,400

£212,000

EXAMPLE TWELVE: Inter Company Trading

Balance Sheet 31/12/95:

H Ltd S Ltd Tangible Assets £120,000 £ 80,000 Investment in S at cost £ 80,000 Current Assets £60,000 £40,000 Current Liabilities (£35,000) £ 25,000 (£30,000) £ 10,000 £225,000 £ 90,000 O.S.C. £150,000 £ 40,000 Reserves £ 75,000 £ 50,000 £225,000 £ 90,000 During year S sold goods to H for £70,000. S had a 25% mark-up on cost. At year end H had goods received from S to the value of £20,000 in stock. H Ltd. owed S £18,000 included in creditors of H and debtors of S. H Ltd. acquired all the shares in S Ltd., when S reserves were £20,000. Required: Prepare the consolidated balance sheet of the H Group.

SOLUTION TWELVE:

Current Assets:

Current Assets in H £ 60,000 Less unrealised profit on stock £20,000 x 25 £( 4,000) 125 £ 56,000 £56,000

Current Assets in S £ 40,000 Less debt with H £(18,000) £22,000 Current Assets £78,000

Current Liabilities:

In H £ 35,000 Less debt with S £(18,000) £ 17,000 In S £ 30,000 Current Liabilities £(47,000)

Goodwill: Cost of Investment £ 80,000 Share of Net Assets Represented By:

Share Capital £(40,000) Reserves at Acq. £(20,000) Goodwill £ 20,000 Reserves:

H Ltd £ 75,000 S Ltd Post acquisition retained profits £50,000 - £20,000 £ 30,000 Less unrealised profit £ (4,000) £101,000

Balance Sheet H & S Group:

Tangible Assets £200,000 (H & S) Intangible Assets £ 20,000

Current Assets £ 78,000 Current Liabilities £(47,000) £ 31,000 £251,000 Ordinary Share Capital £150,000 (H only) Reserves £101,000 £251,000